The COVID-19 crisis has led to a surprising upsurge in transactions using special purpose acquisition vehicles (SPACs), which are now a popular alternative to taking companies public. Through SPACs, retail investors can invest in companies that otherwise would have to face several VC financing rounds before launching an IPO.
A turning point may have been reached, however, as the market for SPACs is oversaturated, according to analysts. In the US, hedge funds are increasingly shorting SPACs (USD 724m of short positions at the beginning of 2021 has jumped to USD 2.7bln in less than three months).
Due to the uptick in SPAC transactions, the Securities and Exchange Commission (SEC) has also drawn attention to SPACs and criticised the information transparency in particular. It has also published guidance on SPAC disclosures and criticised the liability rules and the lack of control over SPAC deals.
Any regulatory changes for SPACs would probably be even more damaging than regulatory scrutiny. Currently, SPACs can provide financial projections for the target company, as is typical in VC transactions. Their liability framework is much more limited than for publicly traded companies, and extending it would wipe out this significant advantage of SPACs to offer projections.
While no significant SPAC lawsuits have been filed yet, this may be expected due to the litigious nature of M&A. New disclosure requirements by the SEC may provide a basis for plenty of litigation. Similarly, the do-or-die nature of SPAC settlements causes vulnerability to fiduciary breach lawsuits. But whether SPACs manage to retain a place in the market in the long-term will depend on their performance.